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Sector Reports - 07/03/2019

The Diversified Banks Sector, ten years after the financial crisis: is the lesson learned?

New Vigeo Eiris report ranks the sector second out of 39 in terms of CSR performance. However, key findings reveal our limited opinion on the sector’s ability to preserve intangible assets and the vulnerability of diversified banks to business ethics risks.

The report provides Vigeo Eiris’ opinion on 67 companies belonging to the Diversified Banks sector. The report includes the sector’s strengths, innovations and best practice as well as controversies, vulnerabilities and key challenges such as business ethics and internal controls, climate change and energy transition, human rights protection, digitalization and human capital and the integration of UN Sustainable Development Goals into banks’ CSR strategy.


Key Findings:

  • Diversified Banks are International large-scale banks with assets of more than EUR 200 billion. The industry serves the needs of corporations, institutions, and retail consumers. These banks provide conventional banking services, investment, brokerage assistance and asset management services.
  • Vigeo Eiris awarded an average overall score of 46 to companies in the Diversified Banks sector, on a scale of 0 to 100. The sector’s performance has increased compared to our previous analysis (43.9).
  • The sector ranks 2nd out of Vigeo Eiris’ 39 sectors, which cover a total research universe of 4,500 companies, with no change compared to the previous ranking.
  • Sector leaders are concentrated in Europe: BNP Paribas, Société Générale, Rabobank are the three best performers, whilst laggards are mostly listed in Emerging Markets. European banks demonstrate a more comprehensive approach to the integration of sustainability into their strategies and governance.
  • The Diversified Banks sector reporting rate is 86%, above the universe average (54%), with European companies communicating most comprehensively on their ESG policies, practices and performances (with an average reporting rate equal to 95%).
  • ESG risk mitigation scores are limited in all risk classes analysed: operational efficiency (48/100) human capital (47/100), reputation (44/100) and legal security (43/100). On this last asset, banks’ performance is heavily affected by recurrent and severe allegations faced mainly in terms of business ethics breaches and internal control failures. As reported by the G30, since the financial crisis “the banking industry has paid an estimated USD 350 to USD 470 billion in penalties (including fines and litigation/settlement charges) for conduct-related matters.
  • The sector faces 930 controversies, affecting 96% of the companies: 21% are involved in critical cases, 69% in high severity cases and 6% in significant cases. The most recurrent controversies concern corruption and money laundering, failures in Internal controls & risk management, violations of consumer rights and concerns by stakeholders on the financing of projects with severe social and environmental impacts.


Key Takeaways:

  • The year 2018 marked the tenth anniversary of the 2008-09 financial crisis. Since then, Regulators and the International community have insisted on the key role that business ethics plays in preventing new crisis to happen. They emphasized the need for the banking sector to build an internal culture of responsible business conduct. However, Vigeo Eiris’ findings reveal that only 28% of the Diversified banks has taken concrete steps on this such as training on business ethics that go beyond legal requirements, proactively supporting a culture of responsible conduct. Moreover, the great majority of banks’ internal controls cover ethical misconduct and non-compliance risks, but the introduction of conduct related performance metrics within remuneration policies for senior executives is observed only in 15% of the sector. Among them, Santander has mechanisms to ensure that variable remuneration is alienated with business ethics: including qualitative adjustments, especially those in the customer and risk category and exceptional adjustments, for instance regarding significant deficiency in ethical aspects, including any issue.
  • On 10 December 2018, the Universal Declaration of Human Rights (UDHR) marked its 70th anniversary. So far, the responsibility of companies towards the protection of human rights have been mainly voluntary (“soft law” approach), but recently, States have begun negotiations for an internationally binding treaty (“hard law” approach) to increase the efficacy of business and human rights initiatives. The responsibility of banks towards human rights mostly focus on their stance towards corporate clients operating in high-risk sectors or countries. Vigeo Eiris’ findings reveal that most companies have adopted formalised policies and risk assessment procedures focused on human rights. But only a minority of them report mechanisms that, according to stakeholders, are more effective in providing or enabling remediation, such as grievance mechanism through which affected communities can voice their concerns directly to the bank. For example, BBVA has several mechanisms that allow the stakeholders to raise inquires, complaints and claims. The mechanisms shall be subjected to a continuous improvement process, based on the efficiency criteria defined by the guiding principles of the United Nations on Companies and Human Rights.
  • Following the scenarios outlined during COP24 and in the new report by the Intergovernmental Panel on Climate Change (IPCC), Diversified Banks have taken relevant initiatives at sector level to enhance their efforts to tackle climate change (e.g. in 2018 for example sixteen leading Banks convened to develop a methodology that helps the finance industry better manage the transition to a low carbon economy). However, at individual level, only a minority of them (22%) appear to have formulated policies and targets to support a low carbon economy. Among them KBC shows a comprehensive commitment, further reinforced in 2018 thanks to the more stringent conditions set for financing and insuring coal-related activities. Finally, data on the carbon footprint of their portfolios are seldom disclosed and stakeholders keep raising awareness on banks’ financing of projects with adverse impact on climate change, with 64% of banks involved in allegations of this type.
  • There is a general consensus on the key role played by the financial industry in achieving the UN Sustainable Development Goals (SDGs). While the SDGs do not explicitly target financial inclusion, greater access to financial services is a key enabler for many of them. As evidenced by Vigeo Eiris’ study, only 18% of the analysed banks disclose quantitative targets in terms of local development and financial inclusion. If measures such as financial support to SME’s/business start-ups, to micro-finance providers and to low income customers are commonly reported by sector players, they still lack transparency on the concrete outcomes of these efforts: only 46% of the panel reports indicators on their impact to local development and only 37% disclose data measuring company efforts to promote financial inclusion.
  • Digitalization and automation will continue to bring structural adjustments in the composition and in the size of the bank industry workforce. UNI Europa Finance, in the joint declaration signed in 2018 on the impact of digitalization on the sector employees, suggests that solutions are the continuous training and lifelong learning to maintain employees skilled, the provision of healthy working conditions and of an appropriate work-life balance. However, Vigeo Eiris’ study shows that only a minority of banks (less than 10% of the panel) describe training programmes aimed at promoting the employability and life-long learning of all employees, including seniors (the most vulnerable ones to the challenges posed by digitalization). For example, Banque Federative du Credit Mutuel has signed with unions a framework agreement on senior employment that foresees dedicated professional training if needed or desired for employees over 45 year-old. The limited average score achieved in terms of Responsible management of restructuring (36/100), also suggests that the sector has not been able to avoid redundancies or to limit the impact of reorganisations, through for example, internal mobility, re-training or individualised follow-up of employees.

Best performing areas:
o Non-discrimination and diversity
o Board of Directors
o Environmental Strategy

Worst performing areas:
o Corruption and money laundering
o Executive remuneration
o Reorganization

Top Performing Companies:
o Europe: BNP Paribas (70/100)
o North America: Toronto-Dominion (48/100)
o Asia Pacific: Commonwealth Bank of Australia; National Australia Bank (59/100)
o Emerging Markets: Banco Bradesco; Itau Unibanco Holdings (44/100)

Companies making best progress since 2017:
o Europe: Bankia (+15)
o North America: Citigroup; The Bank of Nova Scotia; US Bancorp; National Bank of Canada (+2)
o Asia Pacific: DBS Group Holdings (+11)
o Emerging Markets: Banco Bradesco (+6)

To view an excerpt of our 2018 Diversified Banks sector report, download the document below
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Keywords : ESG